1. Zero Hedge / Credit Suisse – there are two major manufacturing order indices in China (PMI). One is from the National Bureau of Statistics and tracks large companies and the Hong Kong Bank Index which tracks smaller businesses. The Hong Kong PMI has been showing a contraction for the last 6 months while the NBS has been showing an expansion.
As Credit Suisse concludes:
The latest trend in PMI fits with the scenario we have been talking about – the economy has bottomed but not out. While the resumption of local government infrastructure projects would help remove the risk of a hard landing, we do not think it would help the economy to rebound quickly and strongly. In our view, Beijing’s tolerance towards slightly more lending is assuring, while the pick-up in some infrastructure investments has also provided a floor to how slow growth can be. However, the underlying demand from the private sector is missing at this moment and that cannot be addressed by simply making monetary policy less restrictive, in our view. Without the involvement of real private businesses and with continued restrictions on lending to developers, we suspect banks will soon run out of qualified borrowers to undertake projects and drive economic activities forward. We think that this data set would cool off the market’s optimism about a quick rebound in Chinese demand.
Zero Hedge –
Yet, the economy is not doing that bad, hence a substantial stimulus is not likely in the near future. We reiterate our core view for the medium term outlook that the Chinese economy has entered a multiple-year period of subdued growth, featuring a weak credit cycle, a weak export cycle, a weak property cycle, and a weak SME cycle.
In Beijing today, China and South Korea said that the two nations would begin talks this month on a free-trade agreement and have a goal of lifting annual trade to $300 billion by 2016, according to Chinese Commerce Minister Chen Deming.
2. CNBC – At the Milken Institute Global Conference: Nouriel Roubini faces off with Michael Milken. Milken is perpetually bullish on America, confident that our challenges can be overcome through innovation and market processes. Roubini, well, he’s Doctor Doom.
Roubini began with an uncharacteristic optimism, quickly rattling off a series of “upside risks” to the global economy: a global economic recovery, an asset price recovery, booming emerging markets, technological progress and ongoing globalization.
Then it was time for the bad news.
The global economy is threatened by the potential for a war with Iran, troubles in the broader Middle East, the possibility of a “slow motion trainwreck” in Europe, and a renewed economic slowdown in Europe. He had a fifth problem, something to do with China, but the debate with Milken that followed didn’t leave enough time for it.
Roubini, who speaks with almost machine-gun-like rapidity, went on to explain that he doesn’t think Iran is the only threat in the Middle East. The Arab spring could become an “Arab winter.”
“The wider Middle East is a total mess and so is a geopoloitical risk for the entire world economy,” he said.
Troubles in countries from Tunisia to Afghanistan could cause a “massive shock in oil prices.”
Milken responded to this by pointing out that a combination of improved technology and policy could alleviate these risks, by making the U.S. less dependent on Middle Eastern oil. Shale deposits, in particular, have the potential to allow countries like the U.S. and Brazil to become the greatest “low-cost suppliers” of energy around the world.
Roubini responded that shale might be a long-term solution but wouldn’t allow us to escape the short-term challenges of oil dependency.
“People who believe that in five years we’re going to be energy-independent are deluding themselves. It’s going to be a 10- to 20-year story,” he said.
This lead to a glimmer of agreement. Milken and Roubini both believe that eventually the world will move away from dependence on Middle Eastern oil—it’s just a matter of timing.
1) Economic data:
a) U.S.: confusing, April data choppy, but 2-2.5 percent 2012 GDP still the consensus
b) China: soft landing, with GDP over 8 percent, still the consensus.
c) Europe: deteriorating. Germany looking weaker a source of concern.
2) Earnings: continue to improve, though companies with exposure to Europe are feeling it. We are 70 percent through earnings season: with 357 companies in the S&P 500 reporting, we are seeing earnings growth of 6.9 percent, well above expectations of 0.95 percent when we began earnings season three weeks ago, according to S&P Capital IQ. 69 percent have beat expectations, that is higher than the historic norm of about 62 percent.
Expectations for Q2 are modest, with only 2 percent growth expected. The problems start in Q3, where there are expectations of 16 percent earnings growth. This is predicated on a substantial lift from bank earnings, based on expectations of loan growth.
3) Housing: bottomed, but no significant lift-off. The amount of homes built and sold is expanding only slowly.